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Major Budget changes for small business

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17 / May / 2011

Changes to FBT

The statutory formula 4 percentage rate scale method for valuing car fringe benefits is to be replaced with a single statutory rate of 20% regardless of kilometres travelled. The flat 20% rate will benefit those who drive less than 15,000 kilometres. Those who use their vehicles for a significant amount of work-related travel or travel  more than 25,000 kilometres might find the alternative operating cost method (or “log book”) method more beneficial. The single 20% rate will simplify the statutory method of valuation and remove the incentive to drive more kilometres to achieve lower a FBT amount. This change can have some flow-on effects as cars are included in the reportable fringe benefits amount that is shown on an employee’s payment summary which could affect eligibility for certain tax concessions.

Upfront Tax Deductions and Write-Offs

Small businesses will be eligible for an instant tax write-off of the first $5,000 of any motor vehicle purchased from 2012-2013.  This will effectively replace the Entrepreneurs Tax Offset (ETO) which will be abolished with effect from the 2012-2013 income year.  This was another of the Henry Review recommendations, as the ETO proved to be a disincentive to businesses due to high compliance costs and poor targeting.  This reform and other tax reforms for small business will be available to small businesses, sole traders and businesses operating through trusts, partnerships and companies.  The Government has also announced other tax reforms including an immediate write-off of all assets valued at under $5,000 (up from the current $1,000) and a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30%.

Reduction in Company Tax Rates

A reduction in the company tax rate to 29% for small businesses will be included as one of the Government’s tax reforms to be introduced in 2012-13.  These reforms were previously announced as part of the Government’s response to the Henry Tax Review, however there has been no legislation introduced to implement them so far. Details have yet to be determined as to which small businesses will qualify.

Reduced PAYG uplift

Tax instalments paid under PAYG will be reduced using the GDP adjustment method for one year.  Instalments in 2011-12 will be set at 4% above a small business’ taxable income for the previous year, half the statutory rate that would have previously applied.  Taxpayers may still vary their quarterly tax instalments if they believe their income is going to be lower or higher than the amount determined by this method, which bases calculations on the previous year’s taxable income, uplifted by a GDP adjustment factor.  From 2012-2013, normal statutory rates will once again apply.

Independent Contractors

The Government will require certain businesses to report annually on payments made to contractors in the building and construction industry.  This is information that businesses should already be collecting under existing tax arrangements.  The measure also includes an increase in funding to the ATO of $46.4m to allow undertaking of data matching and audits, as well as the reviewing of contractors’ tax liabilities. Funding will also go towards assistance and education for the industry.  The Government plans to consult with the public on options to introduce similar reporting regimes for payments to contractors in the commercial cleaning industry. There has been general speculation that these measures could be extended to other industries.

Source: Institute of Public Accountants – A Worry Free Federal Budget Summary!

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